Linsanity in the Pantheconomy

Ken Rogoff comments on the rise of Jeremy Lin to super-stardom in recent weeks.  Of interest in this article is the parallel drawn between professional athlete salaries and Wall Street executive salaries.  Rogoff suggests a seeming contradiction in public opinion over exuberant NBA or NFL players' pay versus the publicly perceived outrage of hedge fund managers taking multi-million dollar bonuses from the top of taxpayer bailouts.  Interesting.

Firstly, what Rogoff dubs the public's "blasé acceptance" must be a Cambridge exclusive.  It may be purely anecdotal to suggest, but I can say, with some degree of certainty, that I have personally had numerous debates regarding professional pay at local beer-drinking, sports-watching establishments, and nearly at every occurrence of ESPN broadcasting blips about lock-outs or Pujols' latest baseball contract.  Sports fans are notorious for scrupulosity of every detail in their respective games, how could KR suggest that wages would exist in some special-good realm of the statistical market?  Seeing as how I have had the proverbial Kobe-Bryant-Alex-Rodriguez-Tom-Brady-salary debate, on several occasions, with a multitude of bar patrons, at varying degrees of sobriety, I can conclude with some degree of certainty that I am in the vast minority of sports fans who find pro-athletes' pay warranted.

As Rogoff himself admits, the NBA collects more than $4 billion in revenues each year, which, any way you slice the pie, is a ton of pie, and that is just the NBA--revenues for the MLB and the NFL clock in at even more staggering amounts: $7.2 billion and $9 billion respectively.  These totals only account for about 0.1% of GDP (as estimated by the BEA), but hey, that's .1% of GDP spent on people watching games.  The moral of the aggregate story,  becomes that there is an undoubted, high demand for professional sports, and further, since there are few trade-offs or substitutions, that curve is likely to be highly inelastic.  The remarkable aspect of Rogoff's commmentary then becomes the sense of flippancy towards a high equilibrium price in an inelastic demand market with low supply.  Excuse me?  All things considered, it would seem they should be paid more.

But I digress.  The bigger question here seems to be Rogoff's assessment of the public's outcry over CEO pay.  Does the same wage-market analysis work?  At first glance, maybe, but let's take three factors that stick out in professional-salary analysis for comparison: high demand, curve elasticity, and general low supply.

The demand for corporate executives is going to be hard to gauge off-handedly.  Sure, Fortune 500 companies want and demand the best possible candidates to run their businesses and accumulate profits.  Sure, they scour the earth, turn over lots of rocks, and run down plenty of back alleys in search of their go-to man or woman.  So, in this analysis, it would be fair to assume that there is in effect a relatively high demand for the highly skilled folks running around in monkey suits on Wall Street.  The crucial difference between NBA players and corporate executives, however, is really going to come in the way the demand curve manifests itself, because, despite the two separate but comparable levels of demand, the shape of the demand is going to look very different.  Consider the values that have already established professional athletes' inelasticity as a demanded good: trade-offs and substitutions.  For good basketball players, there is hardly any substitution.  Sure, you can watch NCAA.  Sure, you can catch YouTube videos of the next LeBron doing 360-jams in high school.  The level of skill and intensity of competition requisite the NBA, however, has shed these alternatives as realistic substitutions.  The US market has a continued propensity to demand high quality goods, and therefore, has demanded a skill level in its professional athletes that can not be substituted easily, if at all.  Converse this approach to executives.  Similar levels of general demand are observed, but what are the trade-offs or possible substitutions for a high skilled executive?  Some would be quick to say there are none--that the Steve Jobs or Michael Bloombergs are diamonds in the rough.  No doubt they are, however, the ability for executives to transfer skills from corporate entity to corporate entity, from application to application, makes their ability to be substituted far greater.  Take for example Dan Akerson, CEO of GM, who also sits on the Board of Directors for American Express and the US Naval Academy Foundation; or, Carl-Henric Svanberg, Chairman of BP, formerly CEO of Scandinavian telecommunications giant Erricsson, which he also still serves for on the Board of Directors.  These are just two examples I could dig up by Wikipedia-ing two large companies off the top of my head.  The point becomes that when a product can be moved from market to market, despite relative value, their marginal utility becomes more equated to other products, resulting in a higher marginal rate of substitution,  which also means a more elastic demand curve. In trying to apply the same example elsewhere, I have to strain my brain to think of any comparable cross-sport successes : Bo Jackson for sure, but who's next?  Michael Jordan?  Come on.

Lastly, supply.  Anecdotally, the BLS reports there were about 2.1 million top executives in 2008--400,400 of which were CEOs.  I say this is anecdotal because of course there are plenty of B-ballers without the same pedigree as Kobe, and plenty of CEOs without the same pedigree as Warren Buffett, however, it would be difficult to believe the margin of difference is so great it could be gauged in millions of people.  The NBA employs roughly 450 players considering team size and amount of teams, the MLB around 750, NFL about 1696.  This accounts for 2,896 pro athletes in the biggest US sports markets.  Even if we were generous enough to double that amount for other US professional athletes and multiply it by an even more than generous factor of 10 to account for all potentially paid minor league teams and amateur athletes driving golf balls for cash a la Happy Gilmore, we only get to 57,920 paid athletes, 60,000 for a round number.  That is still only around 1/7 of the total of amount of CEOs working in the US, not to mention an astronomically small ratio when considering all executives.  Taking into account that we would probably want to consider the actual amount of employed as the conluence of supply and demand, it would be hard to legitimize this equilibrium or market clearing quantity as sole evidence of smaller pro athlete supply, however, considering the already established comparable levels of demand, it becomes more evident.  Mr. Rogoff, please respond.

Of course, no quandaries here to any critique of small or even huge leaps in logic or numbers, so if any refutation with greater logic or numbers or both sallies forth, by all means, shoot for 3.

Rich people vs. Rich people

Jeremy Grantham, of GMO LLC acclaim, shreds up this article in FT, espousing why rich people are legitimately begrudged by the public at large.  The article is reminiscent of calls by the likes of Elizabeth Warren and Warren Buffett, members of the super wealthy who are fine with giving a little back to the universe.  If there are not any plans to start a reality show with the super rich battling the super wealthy, their should be, as further statistics suggest that the general populous agrees with these three well-off business-people in bringing the pain to the upper echelons of society.

­A New European Growth Agenda by Phillippe Legrain. Precise and astute commentary, shame he is just an advisor and not the one holding the reins.